* C$ at C$1.0370 or 96.43 U.S. cents
* Bonds rally on risk aversion
By Claire Sibonney
TORONTO, May 18 (Reuters) - The Canadian dollar weakened
against the U.S. currency on Tuesday as investors took their
cue to abandon riskier assets from the tumbling euro on
festering concerns deep government spending cuts in Europe will
The euro sank to a four-year low against the greenback
after Germany said it plans fresh limits on short-selling in
shares of the country's 10 most important financial
The move weighed heavily on oil, a key Canadian export, as
U.S. crude futures settled under $70 a barrel. [O/R]
"There's going be a lot of activity if the euro continues
to plummet," said C.J. Gavsie, managing director of foreign
exchange sales at BMO Capital Markets.
"And a lot of this news is also hitting Europe after
European markets have closed ... when Europe opens up tomorrow
you're going to see a lot of selling positions just because of
the risk appetite waning."
The ban on naked short-selling will also apply to credit
default swaps on euro government bonds as well as euro
In naked short selling, a trader sells a financial
instrument short, betting that it will fall, without first
borrowing the instrument or ensuring that it can be borrowed,
as would be done in a conventional short sale.
The Canadian dollar <CAD=D4> finished the North American
trading session at C$1.0370 to the U.S. dollar, or 96.43 U.S.
cents, down from Monday's close at C$1.0337 to the U.S. dollar,
or 96.74 U.S. cents.
Earlier, the currency strengthened as high as C$1.0246, or
97.60 U.S. cents, and weakened to C$1.0411, or 96.05 U.S.
Gavsie said currency watchers are eyeing the next key
resistance level between C$1.0430 to the C$1.0460 area.
"It's going to be difficult to blast through it but if
euro/U.S. continues to tumble at this pace, here comes C$1.05
in a hurry."
Also weighing slightly on the currency, market analysts
were surprised by data that showed foreigners sold Canadian
securities in March for the first time in more than a year.
"We're sort of seeing the C$ pulled in opposite
directions," said Peter Buchanan, senior economist at CIBC
Capital Markets, noting that while oil and natural gas prices
are down, rebounding base metals are lending some support to
the commodity-linked currency. [MET/L]
He also pointed to rising U.S. housing starts and falling
building permits sending the market mixed signals about the
economic recovery. [ID:nN18135902]
BONDS GAIN AS RISK DRIES UP
Canadian bonds prices rose across the curve, tracking U.S.
Treasures higher against a backdrop of renewed risk aversion.
"We've certainly seen bonds rally, government securities in
both Canada and the U.S. today, so I think what we're seeing is
a continued flight to quality bid here," added Buchanan.
Besides developments in Europe, Buchanan said investors
will also be eyeing Wednesday's U.S. inflation figures.
The two-year government bond <CA2YT=RR> gained 22 Canadian
cents to C$99.46 to yield 1.772 percent, while the 10-year bond
<CA10YT=RR> surged 92 Canadian cents to C$100.80 to yield 3.406
In new issue news, the province of Ontario confirmed the
mandate for a benchmark sale of yen-denominated bonds.
As well, HSBC Bank Canada sold C$500 million of 11-year
(Reporting by Claire Sibonney; Editing by Jeffrey Hodgso